2021 (12) TMI 346 - HC - Companies Law

Court voids post-winding up property sales, ex-director's attempts fail. Official Liquidator successful in challenge.

The court held that the sale transactions of immovable properties post-winding up order were void as they were not validated by the court. The ... Seeking cancellation of specific sale transactions pertaining to the immovable properties of the company in liquidation - Sections 536 and 537 of the Companies Act, 1956 - whether the Dispositions are liable to be validated in terms of Section 536(2) of CA 1956? - HELD THAT:- From a plain reading of Section 536(2), it is evident that any disposition of the property of the company or a transfer of shares in the company or alteration in the status of its members, if done after the commencement of winding up, is void unless the court orders otherwise. In terms of Section 441(2) of CA 1956, as regards companies which are ordered to be wound-up, the winding up of the company is deemed to commence at the time of presentation of the petition for winding up. Consequently, the winding-up of the Company would relate back and commence from the date of presentation of C.P.No.153 of 2002. As a corollary, the winding-up in the present case commenced some time in the year 2002. The Dispositions should be tested by raising the other questions. For such purpose, the question on valuation is salient. The admitted position is that no valuation report pertaining to the relevant assets are on record. The management of the Company, if acting in the best interest of the Company, should have obtained a valuation report from a credible valuer before undertaking the sale of such a large extent of property. A second aspect to be noticed that the agreement of sale was executed on 18.06.1997, and the reference to the BIFR was made on 30.07.1997, which is less than 45 days thereafter - It is also pertinent to point out that many of the endorsements pertain to the period subsequent to the commencement of winding-up and even to the winding-up order. The report dated 06.10.2021 of the Deputy Official Liquidator indicates that only 2% of the admitted claims of about ₹ 23.81 crore could be discharged from the sale proceeds in course of liquidation. Thus, the Dispositions did not enable the discharge of liabilities to creditors such as SIPCOT and TIIC or even to meet workmen's dues. Section 536(2) cannot be construed in isolation, as if it operates in a silo. Once a winding-up order is passed, in terms of Section 456(2) of CA 1956, all the property and effects of the company concerned shall be deemed to be in the custody of the court, and the Official Liquidator is required to take into his custody all the property and actionable claims of the company in terms of Section 456(1) thereof. It is also beyond doubt that the relevant board of directors stands superseded upon a winding up order being issued and, therefore, such directors lose the authority to act on behalf of the company in liquidation. As adverted to earlier, the seven sale deeds were executed on various dates between April 2009 and August 2010. These documents were executed by S.Khaja Mohideen pursuant to a purported power of attorney bearing Document No.1759/2008 dated 26.08.2008. Section 537 (2) of CA 1956 is relevant in this context and provides that any sale, without the leave of the court, of the properties of a company which is being wound-up is void. This Court in INDIAN BANK VERSUS VGP. FINANCE LTD. [2008 (9) TMI 550 - HIGH COURT OF MADRAS] formulated a significant test to decide whether a transaction is liable to be validated. The said test is whether the Court would have approved of such transaction had its permission been sought at the time when the transaction was entered into. If the said question were to be posed in relation to the Dispositions, the unequivocal answer would be that such Dispositions would not have been permitted. Therefore, the ex-director has failed to make out a case to validate the Dispositions. On the contrary, the Official Liquidator has established that the Dispositions are liable to be declared void. Application disposed off. Issues Involved:1. Validity of sale transactions of immovable properties post-winding up order.2. Interpretation of Section 536(2) of the Companies Act, 1956.3. Bona fide nature and interest of the sale transactions for the company.4. Compliance with procedural and legal requirements for the sale of assets.5. Adequacy of sale consideration and its utilization for the company’s liabilities.Detailed Analysis:1. Validity of Sale Transactions Post-Winding Up Order:The Official Liquidator filed C.A.No.150 of 2019 to cancel specific sale transactions of the company's immovable properties under Sections 536 and 537 of the Companies Act, 1956 (CA 1956). An ex-director sought validation of these transactions via C.A.No.395 of 2019 under Section 536(2) of CA 1956. The court noted that these transactions were executed after the winding-up order, making them prima facie void unless validated by the court.2. Interpretation of Section 536(2) of the Companies Act, 1956:Section 536(2) states that any disposition of the property of the company after the commencement of winding up shall be void unless the court orders otherwise. The court explained that winding up is deemed to commence from the date of the presentation of the winding-up petition, which in this case was in 2002. The court emphasized that the legal fiction in Section 441(2) gets triggered only upon a winding-up order being passed, making the transactions void unless validated by the court.3. Bona Fide Nature and Interest of the Sale Transactions:The ex-director argued that the transactions were in the interest of the company, initiated in 1997, and used to discharge debts to secured creditors like UCO Bank. However, the court scrutinized whether the transactions were bona fide and in the company’s interest. The court referred to the judgment in V.G.P. Finances, which formulated questions to assess the validity of such transactions, including whether they were bona fide, carried out in the ordinary course of business, or necessary to keep the company going.4. Compliance with Procedural and Legal Requirements:The court noted several procedural lapses: the agreement of sale was executed by a power of attorney holder, not a director; there was no valuation report for the assets; and the sale consideration was inadequately justified. Additionally, the BIFR had prohibited the sale of the company's assets without its consent, which was not obtained.5. Adequacy of Sale Consideration and Its Utilization:The sale consideration of Rs. 1,32,00,000/- for 65 hectares of land was not adequately justified. The court observed that the proceeds from the sale did not sufficiently discharge the company’s liabilities, as only 2% of the admitted claims could be settled. The court concluded that the transactions were not in the best interest of the company and would not have been approved if sought at the time.Conclusion:The court held that the ex-director failed to make a case for validating the dispositions, while the Official Liquidator established that the transactions were void. Consequently, C.A.No.150 of 2019 was allowed, and C.A.No.395 of 2019 was dismissed, with the Official Liquidator directed to file appropriate consequential applications. There was no order as to costs.